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The Paradox behind assumptions of economic growth

My Times column is on economic projections for the year 2100.

In the past 50 years, world per capita income roughly trebled in real terms, corrected for inflation. If it continues at this rate (and globally the great recession of recent years was a mere blip) then it will be nine times as high in 2100 as it was in 2000, at which point the average person in the world will be earning three times as much as the average Briton earns today.

I make this point partly to cheer you up on Easter Monday about the prospects for your great-grandchildren, partly to start thinking about what that world will be like if it were to happen, and partly to challenge those who say with confidence that the future will be calamitous because of climate change or environmental degradation. The curious thing is that they only predict disaster by assuming great enrichment. But perversely, the more enrichment they predict, the greater the chance (they also predict) that we will solve our environmental problems.

Past performance is no guide to future performance, of course, and a well aimed asteroid could derail any projection. But I am not the one doing the extrapolating. In 2012, the Intergovernmental Panel on Climate Change (IPCC) asked the Organisation for Economic Cooperation and Development (OECD) to generate five projections for the economy of the world, and of individual countries, in 2050 and 2100.

They make fascinating reading. The average per capita income of the world in 2100 is projected to be between three and 20 times what it is today in real terms. The OECD’s “medium” scenario, known as SSP2, also known as “middle of the road” or “muddling through”, sounds pretty dull. It is a world in which, in the OECD’s words, “trends typical of recent decades continue” with “slowly decreasing fossil fuel dependency”, uneven development of poor countries, delayed achievement of Millennium Development Goals, disappointing investment in education and “only intermediate success in addressing air pollution or improving energy access for the poor”.

And yet this is a world in which by 2100 the global average income per head has increased eight-fold [corrected from 13-fold] to $60,000 [corrected from $100,000 in the original article] (in 2005 dollars) compared with $7,800 today. Britain will have trebled its income per head. According to this middling scenario, the average citizen of the Democratic Republic of Congo, who today earns $300 a year, will then earn $42,000, or roughly what an American earns today. The average Indonesian, Brazilian or Chinese will be at least twice as rich as today’s American.

Remember this is in today’s money, corrected for inflation, but people will be spending it on tomorrow’s technologies, most of which will be cleverer, cleaner and kinder to the environment than today’s — and all for the same price. Despite its very modest assumptions, it is an almost unimaginable world: picture Beverly Hills suburbs in Kinshasa where pilotless planes taxi to a halt by gravel drives (or something equally futuristic). Moreover, the OECD reckons that inequality will have declined, because people in poor countries will have been getting rich faster than people in rich countries, as is happening now. All five storylines produce a convergence, though at different rates, between the incomes of poor and rich countries.

Can the planet survive this sort of utopian plutocracy? Actually, here it gets still more interesting. The IPCC has done its own projections to see what sort of greenhouse gas emissions these sorts of world would produce, and vice versa. The one that produces the lowest emissions is the one with the highest income per head in 2100 — a 16-fold increase in income but lower emissions than today: climate change averted. The one that produces the highest emissions is the one with the lowest GDP — a mere trebling of income per head. Economic growth and ecological improvement go together. And it is not mainly because environmental protection produces higher growth, but vice versa. More trade, more innovation and more wealth make possible greater investment in low-carbon energy and smarter adaptation to climate change. Next time you hear some green, doom-mongering Jeremiah insisting that the only way to avoid Armageddon is to go back to eating home-grown organic lentils cooked over wood fires, ask him why it is that the IPCC assumes the very opposite.

In the IPCC’s nightmare high-emissions scenario, with almost no cuts to emissions by 2100, they reckon there might be north of 4 degrees of warming. However, even this depends on models that assume much higher “climate sensitivity” to carbon dioxide than the consensus of science now thinks is reasonable, or indeed than their own expert assessment assumes for the period to 2035.

And in this storyline, by 2100 the world population has reached 12 billion, almost double what it was in 2000. This is unlikely, according to the United Nations: 10.9 billion is reckoned more probable. With sluggish economic growth, the average income per head has (only) trebled. The world economy is using a lot of energy, improvements in energy efficiency having stalled, and about half of it is supplied by coal, whose use has increased tenfold, because progress in other technologies such as shale gas, solar and nuclear has been disappointing.

I think we can all agree that this is a pretty unlikely future. It’s roughly like projecting forward from 1914 to a wealthy 2000 but with more people, lots more horse-drawn carriages and coal-fuelled steamships, and no clean-air acts. But the point is that making these sorts of assumption is the only way you can get to really high levels of carbon dioxide in 2100. And even so, remember, the average person is three times as rich. If the food supply had collapsed and fossil fuels had run out, then there would hardly be 12 billion people burning ten times as much coal and living like kings, would there? You cannot have it both ways.

These IPCC and OECD reports are telling us clear as a bell that we cannot ruin the climate with carbon dioxide unless we get a lot more numerous and richer. And they are also telling us that if we get an awful lot richer, we are likely to have invented the technologies to adapt, and to reduce our emissions, so we are then less likely to ruin the planet. Go figure.

[Post-script: Bjorn Lomborg arrives at similar conclusions – that the IPCC’s own figures show clearly that the cure is worse than the disease.]

By Matt Ridley | Tagged:  rational-optimist  the-times